Accounting Final Exam

Tawney Company is considering investing in a new piece of equipment that costs $700,000. The new equipment should provide a cost savings of $250,000 per year over its five-year life. What is the payback for the new equipment? 6.1 years 4 years 3.9 years 2.8 years

2.8 Years payback

ABC Company has purchased a piece of equipment that cost $600,000 with an average amount invested of $400,000 and has an expected life of 5 years. The company's expects average operating income from the equipment to be $20,000 per year. What is the accounting rate of return (ARR)? 15% 1.6% 5% 10.2%

ARR = Average annual operating income /Average amount invested = $20,000/ $400,000 = 5%

________ is a stream of equal cash payments made at equal time intervals. An annuity Simple interest Net present value Compound interest

An annuity is a stream of equal cash payments made at equal time intervals.

An operational asset used for a long period of time is referred to as a ________. capital investment capital asset capital budgeting capital rationing

An operational asset used for a long period of time is referred to as a capital asset.

Which is NOT a popular method for analyzing potential capital investments? payback period capital budgeting accounting rate of return (ARR) net present value (NPV)

Capital budgeting is not a method for analyzing capital investments. The four popular methods of analyzing potential capital investments are: Payback Accounting rate of return (ARR) Net present value (NPV) Internal rate of return (IRR)

Manager of the Housekeeping Department at one hotel

Cost Center

Manager of the complimentary breakfast buffet at one hotel

Cost Center

Customer satisfaction ratings

Customer

Number of repeat customers

Customer

Percentage of market share

Customer

When journalizing for a favorable direct materials cost variance ________. Direct Materials Cost Variance is debited Direct Materials Cost Variance is not recorded in a journal entry Manufacturing Overhead is debited Direct Materials Cost Variance is credited

Direct Materials Cost Variance is credited when there is a favorable variance.

Return on investment

Financial

Revenue growth

Financial

Variable Cost Per Unit

Financial

Lilly Company allocates manufacturing overhead based on machine hours. Each chair produced should require 4 machine hours. Standard fixed cost per machine hour is $8.00. According to the static budget, $16,400 is expected in fixed manufacturing overhead costs. During January, Lilly Company actually used 2,100 machine hours to make 510 chairs. The company spent $6,800 in variable manufacturing overhead costs and $16,100 in fixed manufacturing overhead costs. What is the fixed overhead volume variance? $80 U $300 U $300 F $80 F

First, calculate Overhead allocated to production. Overhead allocated to production = Standard fixed overhead allocation rate X Standard quantity of the allocation base allowed for actual output = $8 x (4 standard hours per unit x 510 units produced) = $16,320 Second, calculate Fixed Overhead Volume Variance. Fixed Overhead Volume Variance = Budgeted fixed overhead - Allocated fixed overhead = $16,400 - $16,320 = $80 U

Jones Company has budgeted two hours of direct labor per chair at a standard cost of $20 per hour. During January, 150 actual hours were worked, completing 100 chairs. All were sold and Jones Company actually labor was $21 per hour. What is Jones Company direct labor efficiency variance for January? $2,000 F $2,000 U $1,000 U $1,000 F

First, calculate SQ by taking (2 hours per chair standard x 100 chairs completed) = 200 standard quantity. Then calculate Direct Labor Efficiency Variance. Direct Labor Efficiency Variance = (AQ - SQ) x SC = (150 actual hours - 200 standard hours) x $20 = $1,000 F It is favorable as actual hours were less than the standard set for the chairs.

Jones Company has budgeted 5 yards of direct materials per chair at a standard cost of $10 per yard. During January, 2,000 actual yards were purchased and used, completing 410 chairs. All were sold and Jones Company actually paid $13 per yard. What is the direct materials efficiency variance? $1,000 U $500 F $500 U $1,000 F

First, calculate SQ by taking (5 yards of material per chair standard x 410 chairs completed) = 2,050 standard quantity. Then calculate Direct Materials Efficiency Variance. Direct Materials Efficiency Variance = (AQ - SQ) x SC = (2,000 actual yards - 2,050 standard yards) x $10 = $500 F It is favorable as actual yards were less than the standard yards budgeted for the chairs

Austin Company allocates manufacturing overhead based on machine hours. Each chair produced should require 4 machine hours. Standard variable cost per machine hour is $5.40. During January, Austin Company actually used 2,100 machine hours to make 510 chairs. The company spent $11,130 in variable manufacturing overhead costs and $9,100 in fixed manufacturing overhead costs. What is the variable overhead cost variance? $210 U $210 F $324 F $324 U

First, calculate actual cost per machine hour. Actual cost per machine hour = total actual variable overhead costs actual machine hours = $11,130 2,100 = $5.30 Second, calculate the Variable Overhead Cost Variance. Variable Overhead Cost Variance = (AC - SC) x AQ = ($5.30 - $5.40) x 2,100 = $210 F The actual cost was less than the standard cost, so the variance is favorable.

Jones Company allocates manufacturing overhead based on machine hours. Each chair produced should require 3 machine hours. Standard variable cost per machine hour is $5.00. During January, Jones Company actually used 1,100 machine hours to make 410 chairs. The company spent $5,720 in variable manufacturing overhead costs and $8,100 in fixed manufacturing overhead costs. What is the variable overhead cost variance? $650 U $650 F $220 F $220 U

First, calculate actual cost per machine hour. Actual cost per machine hour = total actual variable overhead costs/ actual machine hours = $5,720/ 1,100 = $5.20 Second, calculate the Variable Overhead Cost Variance. Variable Overhead Cost Variance = (AC - SC) x AQ = ($5.20 - $5) x 1,100 = $220 U The actual cost was more than the standard cost, so the variance is unfavorable.

Austin Company allocates manufacturing overhead based on machine hours. Each chair produced should require 4 machine hours. Standard variable cost per machine hour is $5.40. During January, Austin Company actually used 2,100 machine hours to make 510 chairs. The company spent $11,130 in variable manufacturing overhead costs and $9,100 in fixed manufacturing overhead costs. What is the variable overhead cost variance? $324 F $210 U $210 F $324 U

First, calculate actual cost per machine hour. Actual cost per machine hour =total actual variable overhead costs/ actual machine hours = $11,130/ 2,100 = $5.30 Second, calculate the Variable Overhead Cost Variance. Variable Overhead Cost Variance = (AC - SC) x AQ = ($5.30 - $5.40) x 2,100 = $210 F The actual cost was less than the standard cost, so the variance is favorable.

Austin Company allocates manufacturing overhead based on machine hours. Each chair produced should require 4 machine hours. Standard variable cost per machine hour is $5.40. During January, Austin Company actually used 2,100 machine hours to make 510 chairs. The company spent $11,130 in variable manufacturing overhead costs and $9,100 in fixed manufacturing overhead costs. What is the variable overhead efficiency variance? $210 F $210 U $324 F $324 U

First, get total standard quantity of machine hours for the efficiency variance based on the 510 units produced. Take 510 units produced * 4 standard machine hours per chair = 2,040 standard machine hours. Then calculate Variable Overhead Efficiency Variance. Variable Overhead Efficiency Variance = (AQ - SQ) x SC = (2,100 - 2,040) x $5.40 = 324 F The actual amount was less than the standard so the variance is favorable.

Andrews Company manufactures round end tables. The company has budgeted variable costs of $200 for each table and fixed costs of $8,000 per month. A static budget predicted production and sales of 300 tables in January, but the company actually produced and sold only 280 tables at a total cost of $66,000. Andrews Company flexible budget variance for total costs is: $4,000 F $2,000 F $2,000 U $4,000 U

Flexible Budget Variance = Actual Results (based on 280 tables sold) - Flexible Budget (based on 280 tables sold) First calculate flexible budget for 280 tables by (280 tables produced x $200 budgeted variable cost per table) + $8,000 budgeted fixed costs = $64,000. Last, take actual costs given of $66,000 - $64,000 = $2,000 Unfavorable sales volume variance.

Select the manager who should be responsible for asking the following question about a significant direct labor cost variance: "Why were direct laborers paid more than expected?" ANSWER Unsure correct Plant manager R&D manager Human resource manager Purchasing manager

Human resource manager

Select the manager who should be responsible for asking the following question about a significant direct labor cost variance: "Why were direct laborers paid more than expected?" Human resource manager R&D manager Purchasing manager Plant manager

Human resource manager

Interest calculated only on the principal amount is referred to as ________. present value interest compound interest simple interest annuity interest

Interest calculated only on the principal amount is referred to as simple interest.

Number of defects found during manufacturing

Internal Business

Number of new products developed

Internal Business

Managers of the Northeast and Southeast Corporate Divisions

Investment Center

Number of hours of employee training

Learning and Growth

Percentage of sales force with access to real-time inventory levels

Learning and Growth

Number of employee suggestions implemented

Learning and growth

Managers usually use the ________ method as a screening device to eliminate investments that will take too long to recoup the initial investment. ARR payback NPV IRR

Managers usually use the payback method as a screening device to eliminate investments that will take too long to recoup the initial investment. They rarely use the payback method as the sole method for deciding whether to invest in the asset.

Which of the following methods does not consider the investment's profitability? net present value (NPV) accounting rate of return (ARR) internal rate of return (IRR) payback

Payback looks at the amount of time it takes to repay an investment, but it does not consider profitability.

Which part of the capital budgeting process identifies and analyzes capital investments? plan strategies act control

Planning is the part of the capital budgeting process which identifies and analyzes capital investments.

Managers of various corporate-owned hotel locations

Profit Center

________ computes the number of dollars returned for every dollar invested, with all calculations performed in present value dollars. Net present value (NPV) Internal rate of return (IRR) Profitability index Payback

Profitability index computes the number of dollars returned for every dollar invested, with all calculations performed in present value dollars. It is calculated by taking present value of net cash inflows / Initial investment.

Manager of the Central Reservation Office

Revenue Center

The NPV of a project is +$1,000. Company management uses a 14% discount rate to derive an NPV and to evaluate capital budgeting proposals. Management also wants projects with payback periods of 5 years or less. Which of the following can be definitely stated based on this limited information? Correct Answers Your Choices The IRR is greater than 14% The project's life is expected to be greater than 5 years. The project has a significant residual value that pushes it return above the discount rate. The use of the 14% discount rate results in the present value of the future expected cash flows from the project to be equal to the initial outlay for the project. The project's expected return is greater than its required return.

Since a discount rate of 14% results in a net present value that is positive, one can conclude the the internal rate of return would be greater than 14% as the IRR is the rate that makes the initial cost of the investment equal to the present value of the investment's future cash flows. Since the discount rate used in NPV calculations should equal the required return, one can also conclude that with a positive NPV, the project is expected to have a rate of return greater than the expected return. From this information, there is no way to no the expected life (in years or any other measure of time) of the project nor can anyone tell from a NPV alone whether a significant expected residual value is assumed.

Jones Company allocates manufacturing overhead based on machine hours. Each chair produced should require 3 machine hours. According to the static budget, the following is expected to incur: 1,200 machine hours per month (400 chairs x 3 hours per chair)$6,000 in variable manufacturing overhead costs$8,400 in fixed manufacturing overhead costs During January, Jones Company actually used 1,100 machine hours to make 410 chairs. The company spent $5,800 in variable manufacturing overhead costs and $8,100 in fixed manufacturing overhead costs. What is the fixed manufacturing overhead allocation rate (to the nearest cent)? $5.00 per machine hour $6.75 per machine hour THE CORRECT ANSWER $7.00 per machine hour $4.83 per machine hour

Standard overhead allocation rate = Budgeted overhead cost Budgeted allocation base = $8,400 budgeted FOH 1,200 budgeted machine hours = $7.00 per machine hour

Fuller Company allocates manufacturing overhead based on machine hours. Each bike produced should require 4 machine hours. According to the static budget, the following is expected to incur: 2,200 machine hours per month (550 bikes x 4 hours per bike)$11,440 in variable manufacturing overhead costs$9,400 in fixed manufacturing overhead costs During January, Fuller Company actually used 2,100 machine hours to make 510 bikes. The company spent $6,800 in variable manufacturing overhead costs and $9,100 in fixed manufacturing overhead costs. What is the variable manufacturing overhead allocation rate (to the nearest cent)? $5.20 per machine hour $6.75 per machine hour $4.83 per machine hour $5.00 per machine hour

Standard overhead allocation rate = Budgeted overhead cost/ Budgeted allocation base = $11,440 budgeted VOH/ 2,200 budgeted machine hours = $5.20 per machine hour

Which of the following is the most reliable method for making capital budgeting decisions? NPV method payback method IRR method ARR method

The NPV method is the most reliable method for making capital budgeting decisions because it (a) incorporates the time value of money, (b) considers the asset's net cash flows over its entire life, and (3) indicates whether the asset will earn the company's minimum required rate of return.

The comparison of the actual results of capital investments to the projected results is referred to as ________. cash flows capital rationing capital budgeting post-audit

The comparison of the actual results of capital investments to the projected results is referred to as post-audit.

The ________ is management's minimum desired rate of return on a capital investment. accounting rate of return (ARR) net present value (NPV) internal rate of return (IRR) discount rate

The discount rate is management's minimum desired rate of return on a capital investment.

You want to have $20,000 in 10 years for a down payment on a new home. How much would you have to invest today (in the present time) to have $20,000 four years in the future if you invested at 8%? Periods Present Value Interest Factors 8% for $1 Future Value Interest Factors 8% for $1 1 .926 1.00 2 .857 1.166 3 .794 1.260 4 .735 1.360 5 .681 1.469 $27,200 $15,880 $14,700 $20,000

The present value = future value x present value factor. In this case, $20,000 x .735 = $14,700

The process of planning to invest in long-term assets in a way that returns the most profitability to the company is referred to as ________. capital budgeting capital rationing capital investment capital returns

The process of planning to invest in long-term assets in a way that returns the most profitability to the company is referred to as capital budgeting

The process of planning to invest in long-term assets in a way that returns the most profitability to the company is referred to as ________. capital rationing capital investment capital returns capital budgeting

The process of planning to invest in long-term assets in a way that returns the most profitability to the company is referred to as capital budgeting.

The time value of money depends on all of the following EXCEPT: the number of periods the interest rate the expected cash flows the principal amount

The time value of money depends on several key factors: The principal amount (p) The number of periods (n) The interest rate (i) Expected cash flows is not a factor in determining the time value of money.

Jones Company invests in a piece of equipment that is expected to generate cash inflows of $50,000 per year over its life of 5 years. The equipment cost $100,000 and has no residual value. What is the average annual operating income from asset? $60,000 $50,000 $20,000 $30,000

Total net cash inflows during operating life of the asset ($50,000 per year * 5 years) $ 250,000 Less: Total depreciation during operating life of the asset ($100,000 - 0) 100,000 Total operating income during operating life 150,000 Divide by: Asset's operating life in years ÷ 5 years Average annual operating income from asset $ 30,000

number of on-time deliveries

customer

Number of warranty claims

internal Business

Average repair time

internal business

Yield rate (number of units produced per hour)

internal business

Employee satisfaction

learning and growth

The process of ranking and choosing among alternative capital investments based on the availability of funds is referred to as ________. post-audit net present value Payback capital rationing

the process of ranking and choosing among alternative capital investments based on the availability of funds is referred to as capital rationing.